- Wedding: April 2013 - Rhode Island
You’re right that the first thing you should do with any extra money you have is pay off your credit card debt for good. Credit card debt is the worst kind of debt to have. In the future, pay off your credit card statement balance every time the statement comes each month. Not the credit card balance, pay the statement balance. This will keep you from getting charged interest or fees. If you use a credit card in this way, it will actually help you to build your credit because you’ll be making on time payments every month.
Other things that affect your credit:
-How much credit you have vs. how much you use (often called “credit utilization”). You want to have a high credit limit but use very little of it. For example, you have a credit limit of $5000 but you never charge more than $1000 each month. Since you’re paying it off in full each month, you never carry more than $1000 balance of your $5000 usable credit. This is better than if you use $4500 of your available $5000.
-How often people check your credit (often called “hard inquiries”). This is a big unknown to most people, but when you apply for something and they pull your credit score, this HURTS your credit score! Obviously, if you really need a car, then there’s not much you can do about this because they will have to check your credit. But you can help by not going to 5 dealerships and having all of them pull your credit. Another thing you can do is when you get advertisements in the mail for new credit cards and such, there should be a number on the bottom of the form that you can call to remove your name from this list. I’m talking about a number that you only have to call once every 5 years. You give them your address and your social, and they keep you from getting unsolicited “pre-approved” offers. These pre-approvals are given to you because someone has pulled your credit score. (Maybe you’re not getting too many of these if your credit is bad, but it’s something to look for in the future).
-How old your credit history is. You want to have old accounts. Don’t close credit cards or lines of credit. If you really don’t want one anymore, then stop using it and it will eventually close on its own. But it’s actually good to have a lot of credit cards because this increases your available credit limit (see above). Again, it’s important to note here that these should be in good standing and you should pay off any statement balances every month on time.
-Your credit score is made up of a record of your activity for the past 7-10 years. This history eventually “falls off” when it goes beyond this time period. So, no one can see that you missed a payment 11 years ago. It depends on what happened as to how long it stays on your credit report. I believe 7 years is credit cards and 10 years is bankruptcy (although you may want to double check this because sometimes the law changes).
You can pull your credit report once a year for free. Use AnnualCreditReport.com NOT freecreditreport or any other site. It’s important to note that there are three credit reporting agencies: Experian, Equifax, and TransUnion. Check your credit report from each one. Sometimes they don’t all have the same information. If you find any errors or discrepancies, you can contact that agency and ask them to update your report by providing the missing information.
You can also contest items on your credit report. For example, I went to college for 4 years consecutively. For whatever reason, my school reported to one of the credit agencies that I was no longer a full-time student. This caused my student loans to go into repayment. Since I wasn’t making payments (because I had no idea this error had occurred), I was missing payments and it was hurting my credit. Once I pulled my report and saw this, I got a letter from the school saying this was in error and sent it to the credit reporting agency to have them remove the delinquencies from my credit history.
This error was obviously not caused by anything I had done, but you can also contest stuff that is your fault. For example, I missed a credit card payment one time in an otherwise flawless history. I called all 3 agencies and explained how I have a great track record and could they excuse this one mistake. 2 of the 3 agencies agreed to remove it.
There are some sites that can help you monitor your credit for free. I like CreditKarma (which shows your TransUnion credit score) and Quizzle (which shows your Experian credit score). Note that they have parts of the websites that cost money to use. Just ignore that stuff and use the free features. You don’t need to pay money to work on your credit when you can pull your reports for free once a year.
You’re doing the right thing by trying to fix your credit now. It can take years to fix, so it’s something you want to start right away. The time to work on your credit is NOT when you need to use it. (For example, you want to buy a house this month). The time to work on your credit is NOW so that when you do need it, you have it.